SWIB’s U.S. Large Cap Outperformance Aided by AI investments

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SWIB’s U.S. Large Cap Outperformance Aided by AI investments

Despite U.S. large cap outperformed the small cap portfolio, the small cap outperformed its benchmark by 2.3% in Q1

June 7, 2024
Markets Group

Tags: AI investments, briefs, investment meeting, small cap, State of Wisconsin Investment Board, U.S. large cap, wisconsin

By Muskan Arora

The $156
billion State of Wisconsin Investment Board’s U.S. large cap outperformed the
small cap portfolio due to major boost from AI investments within the large cap
tech sector.

Yet the U.S. small cap portfolio still outperformed its benchmark in Q1
by 2.3%, making the three and five-year relative returns positive.

The Q1’s
performance was aided by strong Q4 2023 earnings reports from the companies
owned by the portfolio, according to a presentation by Joy Mukherjee, head of small cap strategy, at
the recent meeting.

The dramatic
changes in the interest rate expectations from Q4 2023 to Q1 2024, drove a
complete reversal in relative performance of large cap vs small cap indices, as
per sources at Bloomberg.

While
reviewing the U.S. small cap strategy, Mukherjee also highlighted industrial
and healthcare sectors to be most favorable.

The
industrial sector was the best performing for SWIB in Q1, as capital goods
outperformed other industry groups.

“Strong
trends stemming from re-shoring, high-tech manufacturing, and data center
construction are continuing,” presented by Mukherjee, as per the meeting
materials.

Investors in
the healthcare sector are gravitating towards more safer investments; however,
the seasonal dip in utilization from Q4 23 to Q1 24 was more than what was
projected.

Moreover,
the security breach at Change Healthcare, the largest clearing house, impeded
collections and consequently cash flows.

Despite the
slight increase in real estate returns, decline in occupancy “across most
verticals, rent growth normalizing (particularly in industrials), hotel rate
growth slowing, and multi-family bottoming”, resulted in weak returns for the
portfolio.

Earnings for
the communication sector were strong, but the market outlook remained varied.

“There were
strong positive revisions in Interactive Media & Services as well as Movies
& Entertainment, while the telecom verticals (Wireless Telecom, Cable &
Satellite, Alternative Carriers) have seen large negative EBITDA revisions,”
presented Mukherjee.

Recent
chatter about AI

As AI becomes the talk of the town
Tim McCusker, NEPC’s CIO believes AI is the “next big platform shift” amid
pension funds and consultants weighing investments in the sector.

“With the new activities and efficiency benefits that
would be created by AI, in the current times, more than 80% of the growth is
focused on China, Europe and North America,” said McCusker.

“China is
doing a tremendous amount of research and pouring a tremendous amount of money
into artificial intelligence,” added the CIO.

Larry Fink, CEO and Chairman of Black Rock also
highlighted huge growth opportunities in AI infrastructure and collaborating
with technologists to build data centers in the US.

Mark Steed, CIO of $21 billion Arizona Public Safety
Personnel Retirement System has been studying AI for over a decade, and in a
recent interview with Markets Group, he highlighted allocators using both
“supervised and unsupervised models” to make better financial decisions.

As pensions and foundations move towards AI, recently
$8 billion Kellogg Foundation also invested 20% of its hedge funds allocation
to AI to write algorithms in its quantitative strategies.